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Minimum Wage: Maximum Impact

This paper steps back from the current annual debate about the appropriate but small rise in the value of the minimum wage to ask a bolder question: are there more radical reforms of the minimum wage that could raise living standards in the years ahead? In part, we are interested in learning what happens in labour markets where the minimum wage is much higher than it is in Britain today.

We are also interested in targeting – could a smarter design do more to benefit the groups that are most in need of higher wages? And are there ways we could ‘project’ the effects of the minimum wage, so that it doesn’t just raise wages at the very bottom, but also of those higher up the distribution?

Key findings

It may be that, given the challenges we now face to living standards, we now need to revisit some of the key debates about design of the National Minimum Wage. Here, we have considered some alternatives. The idea of introducing a premium NMW for older workers, for example those over 30, has merit. This would have the added benefit of making the minimum wage somewhat better targeted on low-income households. The downside is that older workers do not earn so much more (at the lower percentiles of the distribution) than younger workers, meaning that any adult premium minimum would be not be much higher than the current adult NMW.

The second possibility we have considered is a higher minimum wage for London. Earnings in London are much higher than in the rest of the UK so the current NMW has less impact in London than it might. A higher rate in this region could lift the wages of large numbers of workers. Although there would be practical difficulties there is little reason to think they would be insurmountable.

Finally, we have considered what could be learned from the approach of the living wage. As we saw, the method of computing the living wage delivers a number that is far too high to be considered as a national, mandatory minimum wage. A narrative that views a living wage as an alternative to existing support through the welfare system, in particular tax credits, overlooks the fact that an hourly wage for individual workers can never guarantee a minimum standard of living at the household level, where living standards depend on the hours of work and the number of children. That said, these limitations take nothing away from the fact that higher hourly wages would help to raise household income. The living wage campaign has demonstrated the virtues of a voluntarist approach. There may be a case for doing more to leverage the authority of the LPC to change pay norms. Asking the LPC to take a judgment on non-mandatory ‘affordable’ minimum wages in different sectors might be one way of raising the pressure on employers who pay unnecessarily low wages, as well as shining a light on sectors of our economy that are dependent on unsustainably low levels of pay.